Why does unemployment tend to rise during a recession?

A recession has a domino effect, where increased unemployment leads to less growth and a drop in consumer spending, affecting businesses, which lay off workers due to losses. A recession occurs when there are two or more consecutive quarters of negative gross domestic product (GDP) growth. In other words, economic growth slows during a recession. Attributes of an economy experiencing a period of recession include a fall in sales and revenues of corporations, a fall in stock prices, falling incomes and a high unemployment rate.

When an economy is facing recession, business sales and revenues decrease, which cause businesses to stop expanding. When demand is not high enough, businesses start to report losses and first try to reduce their costs by lowering wages or keeping wages where they are and ceasing to hire new workers, which increases the unemployment rate. A decrease in the GDP causes firms that aren't recession-proof to report losses and can cause some companies to go bankrupt, resulting in massive layoffs that also increase unemployment.

Recession effects can snowball and worsen the situation. When there are massive layoffs and no jobs being created, consumers tend to save money, tightening the money supply. When there is a tightened money supply, unemployed workers and workers with low wages tend to save more and spend less, decreasing the demand for goods and services and decreasing consumer spending. This drop in demand lowers the growth rate of companies and the economy, which, in turn, leads to greater losses in non-recession-proof business and higher unemployment. (For related reading, see: Types of Unemployment.)